According to the provisions of the Companies Act, a merger by acquisition is a status change whereby one or more companies are merged into another company through the transfer of all assets and liabilities to that company, as a result of which the acquired company ceases to exist without undergoing liquidation.
A merger by acquisition status change may be carried out through:
- the regular procedure, in accordance with the provisions of Articles 490 to 500 of the Companies Act, and
- the simplified procedure, in accordance with the provisions of Article 501 of the Companies Act.
In the case of the merger of a subsidiary company into its parent, i.e., the controlling company, the simplified procedure for implementing the status change shall apply.
Simplified Procedure for Conducting Status Change in Case of Acquisition by a Controlling Company
If the recipient company is a controlling company with at least 90% share in the share capital of the transferring company, i.e. with at least 90% of stocks carrying voting rights in the transferring company, the status change by way of acquisition is conducted without the decision on status change rendered by the general meeting of the recipient company if the following conditions are satisfied:
- If the recipient company executed the publication referred to in Article 495 of this Act no later than one month before the day of holding of a session of the general meeting of the transferring company at which the decision on status change is made;
- If, during the period of one month preceding the date of holding a session of the transferring company’s general assembly at which the decision on the status change is passed, the recipient company has made certain acts and documents available for inspection by its members at the company’s registered office, namely:
1) Draft agreement on status change, as well as all the documents which are Integral parts of the agreement, namely:
– Proposal of a decision on amendments to the memorandum of association, i.e. articles of association of the recipient company, as well as a proposal of the articles of association of that company if such company is a joint stock company;
– List of the members of the transferring company with the designation of the par value of their shares, i.e. stocks in the recipient company, as well as shares, i.e. stocks they acquire in the recipient company;
– List of employees in the transferring company whose employment continues in the recipient company.
2) Financial statements, with the auditor’s opinion, with the balance on the day that is no more than six months before the day of adoption of the decision of the general meeting on status change; A company may use the following documents as the financial statements:
– Latest annual financial statements with the auditor’s opinion, if no more than six months have elapsed from the end of the business year until the day of rendering of the decision of the general meeting on the status change, or
– Semi-annual financial statements with the auditor’s opinion, if more than six months have elapsed from the end of the business year until the day of rendering of the decision of the general meeting on the status change.
3) Auditor’s report on the completed audit of the status change;
4) Report on the status change compiled by the board of directors, i.e. executive board, if the company has a two-tier management system;
5) Proposal of the decision of the general meeting on the status change;
6) The annual financial statements for the last three years for each of the companies involved in the status change, and the auditor’s opinion, if they were subject to audit, in the seat of the company, at a minimum, during the period of one month that precedes the day of holding of the session of the general meeting at which the decision on status change is made. - If one or more stockholders of the recipient company holding the stocks that represent at least 5% of its share capital do not demand the convening of the general meeting of the recipient company to render a decision on status change, no later than one month before the day of holding of a session of the general meeting of the transferring company at which the decision on status change is made.
In the case when the recipient company is a controlling company with at least 90% share in the share capital of the transferring company, i.e. with at least 90% of stocks carrying voting rights in the transferring company, the transferring company is not under an obligation to compile and submit to the general meeting for approval the following reports:
- Auditor’s report on the completed audit of the status change;
- Report on the status change compiled by the board of directors, i.e., the executive board, if the company has a two-tier management system.
If the recipient company is a sole member of the transferring company, the agreement on status change does not contain the data on the exchange of shares, i.e. stocks and, in particular:
- The ratio at which the shares, i.e. stocks in the transferring company, are exchanged for the shares, i.e. stocks in the recipient company, and the amount of cash payment, if any;
- The manner of taking over the shares, i.e. stocks, by the recipient company and the date from which such shares, i.e. stocks, carry the right of participation in profit;
- The data on the special rights that the members of the transferring company holding special rights acquire in the recipient company.
The issues of the simplified procedure of the status change that are not specifically regulated by Article 501 of the Companies Act are subject to the provisions of the Companies Act governing the regular procedure of status changes.
Prohibition of Creation of Fictitious Capital
In the case of a merger by acquisition of a subsidiary, there is no increase in the share capital of the recipient company, as follows from the provision of Article 503 paragraph 1 of the Companies Act, which is intended to prevent the creation of fictitious capital in the acquiring company. According to the mentioned provision of the Companies Act, the recipient company may not increase its share capital as a result of a status change on the grounds of shares, i.e. stocks which:
- The recipient company holds in the transferring company;
- The transferring company holds in the recipient company (the so-called reverse acquisition).
Also, the recipient company may not issue stocks in exchange for:
- Stocks which the recipient company holds in the transferring company, i.e. stocks that a third party holds on its own behalf and for the account of the recipient company;
- Own stocks of the transferring company, i.e. stocks that a third party holds on its own behalf and for the account of the transferring company.
The shares, i.e., stocks that a transferring company holds in the recipient company, that are transferred to the recipient company as a result of the status change, become the recipient company’s own shares, i.e., its stocks.
Notwithstanding the foregoing, the recipient company may, if so envisaged by the agreement on status change, i.e., the division plan, exchange the shares, i.e., stocks, of the members of the transferring company for the shares, i.e., stocks, held by the transferring company in the recipient company.
Read more:
Status change – spin-off by incorporation »
Protection of interests during implementation of status change »
Status changes according to the Law on Business companies – concept and types »
